An old bill payable amounted to ₹75,000. The creditor accepted ₹67,500 in full and final settlement. What effect will this have on the Revaluation Account at the time of reconstitution?

Correct answer: ₹7,500 gain

The liability decreased from ₹75,000 to ₹67,500, resulting in a saving of ₹7,500 for the firm. This is a gain and ₹7,500 is credited to the Revaluation Account. The ₹67,500 is the final settlement paid to the creditor, not the amount of gain. Exam tip: A reduction in a liability is treated as a gain and credited to the Revaluation Account.